Vietnam’s manufacturing finally stabilizes but stagnates

Vietnam’s manufacturing finally stabilizes but stagnates PART 1 OF 1

Vietnam’s manufacturing finally stabilizes but stagnates

Vietnam’s manufacturing finally stabilizes but stagnates

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As mentioned previously PMI, or Purchasing Managers Index, is a leading indicator of the health of a country’s manufacturing sector. A number above 50 indicates an expansion and a number below 50 indicates a contraction. HSBC compiles a PMI along with sub-indexes that it publishes monthly on select emerging markets. The PMI is a weighted average of the following sub-indexes: Orders Index 30%, Output Index 25%, Employment Index 20%, Suppliers’ Delivery Times 15%, Stock of Items Purchased 10%. With a PMI trend consistently edging closer to 50 since September 2011, investors and analysts have been awaiting a turnaround.

On February 1st the HSBC latest report on Vietnam’s January PMI results indicated a continued stagnation of their manufacturing sector with a PMI of 50.1. Although better than the heavy contractions of May to August, this is the fifth month that PMI has hovered around the 50 mark with no change. While stagnation in manufacturing is not the news investors were necessarily hoping for, it also has not been enough of a drag to prevent a VanEck Vectors Vietnam (VNM) 31% price increase since the start of 2013. PMI has been graphed below to illustrate the recent stabilizing trend. However, investors should not confuse this with solidly good news. The way PMI is measured is more important as a tool to manufacturers than to investors. PMI topped 50 in January mainly due to minor increases in new orders, minor increases in output and minor employment increases. The measures such as new export orders, input costs and output prices are far more important to the manufacturing sector’s profitability, and thereby the return to investors.

Investors need to keep an eye on how the sub-indexes are performing over the coming months rather than relying simply on headline PMI numbers. While these recent numbers are positive compared to the troubles facing the manufacturing sector months ago, they bring problems of their own, such as margin compression. Investors holding VNM have likely found that its recent price growth has left Vietnam holding a higher percentage of their overall portfolio and should consider allocating a small part of their portfolio to Vanguard MSCI Emerging Markets ETF (VWO) or iShares MSCI Emerging Markets (EEM) which offer more diversified emerging market exposure.


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